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Financial Protection

Zoe Team

Jun 29, 2018

8 min read

A financial advisor reviewing a plan with two clients at a table

Key Takeaways

Financial protection encompasses both emergency savings and insurance coverage.
Cash reserves provide immediate liquidity for unforeseen emergencies.
Diverse insurance types help mitigate risks to your medical and financial well-being.

Frequently Asked Questions

What constitutes basic financial protection?

It typically includes a combination of an emergency cash fund for unexpected costs and various insurance policies to hedge against major risks.

Why are cash reserves important?

Having a rainy day fund provides immediate access to liquid assets, preventing you from relying on debt when emergencies occur.

What role does insurance play here?

Insurance policies like medical or life coverage protect you and your assets from significant, unpredictable financial losses.

Types of Financial Protection

Financial protection can take many forms. It could include having a rainy day fund of cash set aside for emergencies and through insurance.

Examples of financial protection in the form of insurance include everything from life insurance to disability and medical insurance.

Emergency Fund

An emergency fund is a stop-gap for unexpected, large financial expenses as a result of negative occurrences, such as job loss, family illness or death, damage to assets, etc. Emergency funds are also sometimes called rainy-day funds.

Generally speaking, you should have the equivalent of 3 to 6 month’s salary in your emergency fund. This figure, however, can vary depending on your situation. In the event that you need to access this money, it needs to be readily available. The best option, therefore, is to keep the money in a savings account. Of course, these accounts don’t offer great returns, but the purpose of the fund is that you have access to cash, as and when you need it.

Life insurance

Life insurance protects your dependents financially, should you die. As with all personal finance tools, the decision to buy life insurance depends greatly on your situation. If you have no dependents, it may not be a requirement for you. But if you have people that depend on your income (children, spouse, parents) then it is definitely something to consider.

Life insurance will replace your income when you die, helping to reduce the financial burden that often comes with the death of a loved one. A number of options are available, the most common of which are term life insurance and whole life insurance.

Term life insurance covers the policyholder for a specific term e.g. 20-years, 30-years. If the policyholder passes away during this term, their dependents receive a payout. However, once this term passes, and you are still alive, the policy ends and any death after this date is not covered. Nevertheless, for most people the biggest risk and thus the best time to own term insurance is when you have a young family. Why? Because at this stage you usually have not accumulated enough savings that if so, where to happen to you, your family would find themselves in a bind. So if you are 40 and you buy a 20 year term insurance plan it would cover you close to retirement at which your children would be adults. The benefit of term life insurance is also that are that it is a lot cheaper than whole life insurance.

Whole life insurance differs from term life insurance in that it covers you for your entire life, and doesn’t work with a set time frame. In addition, most whole life policies include a ‘cash value’ portion - a portion of your premiums that is invested into a fund, which you can access and use for other purposes during your life. A major disadvantage, however, is that it is noticeably more expensive than term life insurance. For most people, whole life insurance is not the right product to own.

Disability insurance

In contrast, disability insurance protects your income in the event that you are disabled (usually to a point where you are unable to reasonably work again). The policy will pay out a predetermined amount to cover your loss of income. The beneficiary in disability insurance cases often is oneself, although it may also include family members who previously relied on the person’s income.

Medical insurance

Often sponsored and partially paid for by one’s employer, medical insurance is there to cover medical expenses. Medical insurance plans can be highly complex and vary greatly between individuals.

Usually, the medical insurance plan holder will pay out of their own pocket up until the deductible limit, whereupon the plan begins to cover the rest. For certain types of expenses, such as emergency room visits, the plan may cover it the costs in their entirety. Medical insurance is highly variable with many different plan designs to fit one’s person and family needs.

Other

Other common examples of financial protection including home insurance, car insurance, and liability insurance. Home insurance is essentially the protection for one’s dwelling, whereby events such as fire, burglary, and other natural and manmade disasters are paid for when they happen. Car insurance is the same except for applied to vehicles, protecting against both accidents and intentional damage. And liability insurance offers a level of payment coverage if one is sued.

Conclusion

All these different kinds of financial protection fit specific risk scenarios that may not apply to everyone. Assessing your financial protection options is a very important part of managing your personal finances. These protections can go a long way in protecting you and your dependents from any major financial blows as life happens.

Financial protection is there for when unexpected events occur. These events range between financially annoying and financially devastating. Without financial protection, an event like a medical emergency or house flooding can end up being a financial blow that’s difficult to recover from. It is important to consider the types of financial protection as part of your personal finances so that you can make the best decision for your specific situation.

Types of Financial Protection

Financial protection can take many forms. It could include having a rainy day fund of cash set aside for emergencies and through insurance.

Examples of financial protection in the form of insurance include everything from life insurance to disability and medical insurance.

Emergency Fund

Life insurance

Disability insurance

Medical insurance

Often sponsored and partially paid for by one’s employer, medical insurance is there to cover medical expenses. Medical insurance plans can be highly complex and vary greatly between individuals.

Other

Conclusion

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Investment advisory services are provided by Zoe Financial, Inc. (Zoe Financial), an investment adviser registered with the U.S. Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training. Learn more about Zoe Financial on the SEC’s Investment Adviser Public Disclosure website. Brokerage services are provided by Zoe Securities LLC and Apex Clearing Corporation, members of the Financial Industry Regulatory Authority Inc. (FINRA) and Securities Investor Protection Corporation (SIPC). Learn more about Zoe Securities and Apex on FINRA’s BrokerCheck website.

The information in the visuals above is for illustrative purposes only and does not represent an actual user's account, balance, or return. Zoe Financial does not provide tax or legal advice.

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